Bonds in a Low-Interest-Rate Environment

Are bondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. still worth holding in your portfolio given how low rates are heading into 2020? Chief Investment Officer Jim Lowell and Vice President Steve Johnson discussed the valuable role bonds play for diversified investors in our recent quarterly webinar*: 2020 Conflicts—Impeachment, Tariffs & Global Dysfunction.

Please enjoy the excerpt below and click here for the full webinar replay to hear more.  

Steve Johnson: Mark Twain once said, “The reports of my death are greatly exaggerated.” And I think the same can be said about bonds in a portfolio. Ever since the great financial crisis, we’ve seen pundits, as [Chairman] Dan [Wiener] mentioned in this webinar, who have warned about higher interest rates and the riskThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. of bonds in one’s portfolio, but the fact remains that bonds remain an essential part of someone’s portfolio who’s looking for income, but also who is looking for a lower risk profile in the portfolio.

Steve Johnson: As we talked about a bad year in the stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. market—as [Director of Research] Jeff [DeMaso] showed, you can be down 20%, 30%, 40%—we know that’s just not the case in the bondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. market. But as Dan said, with the 10-year Treasury today down around 1.72%, 1.74%, the expectations for bonds going forward aren’t as great as they’ve been. And what we would encourage investors is really to resist the urge to go out and chase that yieldYield is a measure of the income on an investment in relation to the price. There are several ways to measure yield. The current yield of a security is the income over the past year (either dividends or coupon payments) divided by the current price.. So as we mentioned, we did trim some of our high-yield positions late last year. We think that’s a prudent place in the portfolios to take a look at… to make sure that you’re not taking on too much risk, because you want that bond piece in the portfolio to be the one that’s going to be the stabilizer should we see some more volatilityA measure of how large the changes in an asset’s price are. The more volatile an asset, the more likely that its price will experience sharp rises and steep drops over time. The more volatile an asset is, the riskier it is to invest in. in the upcoming months.

Jim Lowell: I think that’s a really important point, Steve. And I would go so far to say, we talk about role of bonds all the time, which makes bonds sound like they’re a monolithic entity, but they are a completely diversified asset class. And so the portfolios that we construct are diversified across duration, that’s interest-rate risk and diversified across credit-related risk [yield-related risk]. So in effect, the disciplined approach that we take to the equityThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid. side, I certainly don’t want our clients to think that we’re not taking a very similar discipline, a diversified approach to the bond side.

Click here for a replay of 2020 Conflicts—Impeachment, Tariffs & Global Dysfunction. Please contact us at (800) 492-6868 to learn more about comprehensive wealth management solutions.